Via Telecopy
1-202-772-9202
February 22, 2006
David R. Humphrey
Accounting Branch Chief
Securities and Exchange Commission
Washington, D.C. 20549
Re; Flanigan's Enterprises, Inc. ("Flanigan's")
Form 10-K for the fiscal year ending October 1, 2005
File No. 01-06836
Dear Mr. Humphrey,
This letter will acknowledge receipt of your comment letter of February 8, 2006
and provide Flanigan's response thereto.
Item 1. Business
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Investment in limited Partnerships
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Miami, Florida, page 7
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1. In our discussion of the substantial structural deficiencies found in
the building premises of the Miami, Florida location, it is noted that
during the third quarter of fiscal year 2004, Flanigan's, as general
partner of the limited partnership, and the landlord agreed upon the
structural repairs required, as set forth by the landlord's engineering
firm, and to equally share the cost thereof, notwithstanding Flanigan's
belief that structural repairs are the responsibility of the landlord.
The landlord denied responsibility for the structural repairs and
management elected to share the cost of the same to expedite the
repairs. During the fourth quarter of fiscal year 2004, the landlord's
contractor made the structural repairs, with the limited partnership
paying its share of such cost, approximately $55,000, to the landlord,
which amount was capitalized into leasehold improvements. No
amortization has been recognized to date. After the structural repairs
were completed by the landlord's contractor, the limited partnership
submitted its building plans to renovate the business premises for
operation of a "Flanigan's Seafood Bar and Grill" restaurant. The
building plans were not processed because there were structural
problems that had not been addressed and others that had not been
adequately rectified. The landlord refused to participate in further
structural repairs to the business premises and Flanigan's, as general
partner of the limited partnership, elected to proceed with the
additional structural repairs, while preserving its right to pursue a
claim against the landlord for its share of the structural repairs, as
previously agreed. To date, the limited partnership has received
nothing from the landlord on account of the additional
David R. Humphrey
February 22, 2006
Page 2
structural repairs and the landlord is denying liability for the same.
As a result of the denial of liability by the landlord, nothing has
been accrued. The amount to be received from the landlord, if any, is
speculative, but will be recognized when and if received.
To clarify the status of Flanigan's claim against the landlord, the
disclosure for this location set forth in Form 10-Q for the quarter
ending December 31, 2005, Note 5, Investment in Limited Partnership,
Miami, Florida, at page 10, specifically provides that the landlord has
denied liability for any share of the additional structural repairs,
nothing has been received from the landlord on account thereof and no
accrual has been made, as the amount of any recovery is speculative.
2. New Limited Partnership Restaurants, at page 32
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As noted in our discussion of new limited partnership restaurants,
pre-opening rent is generally less for new leases than for the purchase
of existing restaurants, which include the assumption of an existing
lease. Most new locations involve the purchase of an existing
restaurant, with the restaurants in Wellington, Florida and Stuart,
Florida being recent exceptions. With the purchase of an existing
restaurant and the assumption of a lease, there generally is no delay
or reduction in rent and the rent is expensed straight line over the
remaining term of the lease. New leases generally include a delay or
reduction in the payment of rent during "pre-opening or construction"
periods. The delay and/or reduction in the payment of rent is a matter
of negotiation, but is always for a period of time which expires the
earlier of the time period negotiated or the date the restaurant opens
for business. There is no delayed or reduced rent once the restaurant
opens for business.
a. Miami, Florida
The new restaurant location in Miami, Florida, which has been
undergoing structural repairs and has taken significantly longer to
renovate and open for business than originally anticipated, was
acquired through purchase of an existing restaurant. The limited
partnership assumed the lease for the business premises, with
Flanigan's having to guaranty the terms of the same. Full rent has been
paid since the limited partnership assumed this lease, with no delay or
reduction of rent at any time. The rent has therefore been expensed
straight line over the term of the lease commencing with the date the
limited partnership assumed the same.
To clarify the fact that the rent paid and expensed for the new
restaurant location in Miami, Florida represents the full rent, the
discussion of "pre-opening rent" paid for this location set forth in
Form 10-Q for the quarter ending December 31, 2005, Item 2, Management
Discussion and Analysis of Financial Condition and Results of
Operation, New Limited Partnership Restaurants, on page 19,
specifically provides that the rent paid
David R. Humphrey
February 22, 2006
Page 3
during the quarter, ($51,000), represents the full rent due pursuant to
the lease. Future disclosure will acknowledge the same, until this
location opens for business.
b. Wellington, Florida
The restaurant in Wellington, Florida was acquired through the entry of
a new lease. No existing restaurant was involved. As a part of the
negotiation of the lease, a "construction period" equal to the earlier
of six (6) months from the date the limited partnership took possession
of the business premises, which occurred on or about October 1, 2004,
versus the date the restaurant opened for business was originally
provided for the commencement of rent. This provision was later amended
to the earlier of seven (7) months from the date the limited
partnership took possession of the business premises versus the date
the restaurant opens for business. Rent commenced on May 1, 2005 or
seven (7) months from the date the limited partnership took possession
of the business premises, which was less than one (1) month before the
restaurant opened for business. Flanigan's, as general partner of the
limited partnership, began expensing the rent straight line over the
term of the lease, commencing with the date the rental payments began,
rather than the date it took possession of the business premises. Rent
expense during fiscal year 2005 was in the amount of $90,000, whereas
it would have been $210,000 if the rent had been expensed straight line
from the date the limited partnership took possession of the business
premises, a difference of $120,000 in rent expense and an associated
difference of $88,800 in minority interest in earnings of consolidated
limited partnerships, the net effect of such being $31,200, which
management considers immaterial. In addition, rent expense through the
remaining term of the lease, including renewal options, will be
approximately $6,500 more annually as a result of the rent expense
commencing on the date rental payments began rather than the date the
limited partnership took possession of the business premises, an amount
management also considers immaterial.
c. Stuart, Florida
The restaurant in Stuart, Florida was also acquired through the entry
of a new lease. No existing restaurant was involved. As a part of the
negotiation of the lease, a "construction period" equal to the earlier
of three (3) months from the date of execution of the lease on July 1,
2003, versus the date the restaurant opened for business was provided
for the commencement of rent. Rent commenced on October 1, 2003, or
three (3) months from the date of execution of the lease, which was
approximately three (3) months before the restaurant opened for
business. Flanigan's, as general partner of the limited partnership,
began expensing the rent straight line over the term of the lease,
commencing with the date the rental payments began, rather than the
date it took possession of the business premises. There was no rent
expense during fiscal year 2003, whereas it would have been
approximately $16,800 if the rent had been expensed straight
David R. Humphrey
February 22, 2006
Page 4
line from the date the limited partnership took possession of the
business premises. The associated change to minority interest in
earnings of consolidated limited partnerships would have been a
reduction of $14,800, resulting in a net effect of $2,000, an amount
management considers immaterial. In addition, rent expense through the
remaining term of the lease, including renewal options, will be
approximately $700 more annually as a result of the rent expense
commencing on the date rent commenced rather than the date the limited
partnership took possession of the business premises.
The pro-forma effect of the rent being expensed straight line over the term of
the leases for the restaurant locations in Stuart, Florida, Wellington, Florida
and Miami, Florida commencing with the date of occupancy, rather than the date
the rental payments began, for the fiscal years ending September 27, 2003,
October 2, 2004 and October 1, 2005 are as follows:
Fiscal 2005 Fiscal 2004
Actual Pro-Forma Actual Pro-Forma
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Revenues 49,032,000 49,032,000 45,933,000 45,933,000
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of merchandise sold:
Restaurants & Lounges 12,502,000 12,052,000 12,002,000 12,002,000
Package goods 8,436,000 8,436,000 7,870,000 7,870,000
Payroll and Related Costs 13,636,000 13,636,000 12,523,000 12,523,000
Occupancy costs 2,853,000 2,972,000 2,740,000 2,739,000
Selling, general and administrative 9,439,000 9,439,000 9,525,000 9,525,000
----------- ----------- ----------- -----------
46,866,000 46,985,000 44,660,000 44,659,000
----------- ----------- ----------- -----------
Income from Operations 2,166,000 2,047,000 1,273,000 1,274,000
----------- ----------- ----------- -----------
Other Income (Expense): (516,000) (427,000) (663,000) (663,000)
----------- ----------- ----------- -----------
Income Before Provision for Income Taxe 1,650,000 1,620,000 610,000 611,000
----------- ----------- ----------- -----------
Provision for Income Taxes 543,000 533,000 170,000 170,000
----------- ----------- ----------- -----------
Net Income 1,107,000 1,087,000 440,000 441,000
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Fiscal 2003
Actual Pro-Forma
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Revenues 40,253,000 40,253,000
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Costs and Expenses:
Cost of merchandise sold:
Restaurants & Lounges 9,978,000 9,978,000
Package goods 7,136,000 7,136,000
Payroll and Related Costs 11,423,000 11,423,000
Occupancy costs 2,158,000 2,175,000
Selling, general and administrative 7,534,000 7,534,000
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38,229,000 38,246,000
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Income from Operations 2,024,000 2,007,000
David R. Humphrey
February 22, 2006
Page 5
Fiscal 2003 (cont'd)
Actual Pro-Forma
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Other Income (Expense): (594,000) (579,000)
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Income Before Provision for Income Taxes 1,430,000 1,428,000
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Provision for Income Taxes 542,000 541,000
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Net Income 888,000 887,000
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For all future leases, rent will be expensed straight line over the term of the
lease commencing with the date of occupancy by Flanigan's or its consolidated
limited partnerships.
Consolidated Statements of Income, page F-3
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3. In Flanigan's filing on Form 10-Q for the quarter ending December 31,
2005, minority interests in earnings of consolidated limited
partnerships has been presented after provisions for income tax and
will continue to be presented after provision for income tax in all
future filings.
Losses on abandonment of property and equipment will be a component of
income from operations in future filings, where there are losses on
abandonment of property and equipment to report. The Consolidated
Condensed Statements of Income in Flanigan's filing on Form 10-Q for
the quarter ending December 31, 2005, does not include a line item for
losses on abandonment of property and equipment because there were no
losses on abandonment of property and equipment during the quarter
ending December 31, 2005 or the comparative quarter ending January 1,
2005.
Note 1. Summary of Significant Accounting Policies
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Inventories, page F-7
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4. Flanigan's inventory consists primarily of liquor and wine products,
which management believes do not become excessive or obsolete. In
future annual reports on Form 10-K, management will disclose that
Flanigan's inventory consists primarily of liquor and wine inventory
and as such, does not become excessive or obsolete that would require
identifying and recording the same.
In future reports on Form 10-K, management will also disclose that
franchise royalties are "earned" when sales are made by limited
partnerships and franchisees. This applies to both restaurant and
liquor package sales. Franchise royalties are paid weekly, in arrears.
Flanigan's manages the books and records of all limited partnerships
and franchises, including collecting funds generated by the same. As a
result, franchise royalties are paid to Flanigan's on a weekly basis
and the franchise royalties are never delinquent. Thus, revenues booked
for franchise royalties are consistently one (1) week
David R. Humphrey
February 22, 2006
Page 6
in arrears, in the approximate amount of $20,000, which amount is
considered immaterial by management.
Note 5. Investments in Limited Partnerships
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Pinecrest, Florida, page F-16
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5. With regard to the purchase of the existing restaurant in Pinecrest,
Florida, please note as follows in response to your inquiries:
a. The $340,000 was the total purchase price, which was allocated
entirely to the purchase of the under-market lease. The
purchase price was not allocated to any other assets, which
included furniture, fixtures, equipment and all transferable
licenses, because the furniture, fixtures and equipment were
disposed of by the limited partnership for nominal value and
the licenses, including restaurant liquor license have no
market value. Restaurant liquor licenses are issued to anyone
who qualifies for the same. In addition, with the exception of
the obligation under the lease which was assumed by the
limited partnership and guaranteed by Flanigan's, no
liabilities were assumed by the limited partnership or
Flanigan's.
b. Management determined that the lease purchased was an
under-market lease from lease rentals in the same shopping
center and its familiarity with rental rates the immediate
area. The lease purchased was executed in 1991 and does not
provide for any rental increases over the term of the same.
The rental rate is approximately $20.00 per square foot and
rentals within the same shopping center were, at the time of
the closing of the purchase of the existing restaurant, $45.00
- $50.00 per square foot. The lease purchased also provides
for percentage rent equal to 5 1/2% of gross sales less base
rent paid and even estimating the percentage rent that should
be payable by the limited partnership, the rent per square
foot will still only be approximately $26.00 per square foot,
which is still well below the market rental value for the
property.
c. The terms of the lease were not re-negotiated at the time of
the purchase or at any time thereafter.
d. No amortization was recorded against the purchase price for
this under-market lease because it was anticipated that the
amortization would begin during the month that the restaurant
opened for business. Please note that the full rent has been
paid since the purchase of the lease and expensed as paid. It
has taken far longer to renovate the business premises than
originally expected as a result of the structural problems
found when the interior improvements were removed to prepare
the same for renovations.
David R. Humphrey
February 22, 2006
Page 7
In response to your comment letter, amortization of the cost
of the lease began October 2, 2005 and is reported in
depreciation and amortization in Form 10Q for the quarter
ending December 31, 2005 in the approximate amount of $5,300.
The amortization is straight line over the balance of the term
of the lease as of October 2, 2005 or a period of
approximately 15 1/2 years. The annual amortization of the
lease is approximately $21,000. If the amortization had
commenced immediately subsequent to the closing of the
purchase of the same in November, 2003, the annual
amortization would have been approximately $19,500. For each
of the fiscal years ending October 2, 2004 and October 1,
2005, Flanigan's would have recorded additional amortization
in the amount of $19,500, an amount management considers
immaterial. Furthermore, for fiscal year 2006 and each fiscal
year thereafter throughout the term of the lease,
(approximately 15 1/2 years), amortization will be
approximately $1,500 higher than it would have been if the
amortization had commenced upon the closing of the purchase of
the lease, before consideration of minority interests, an
amount management also considers immaterial.
Wellington, Florida, page F-18
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6. The limited partnership owning the restaurant in Wellington, Florida
raised the aggregate sum of $1,850,000 from its private offering to
renovate and open its restaurant for business. Of the funds raised,
Flanigan's invested $485,000 in this limited partnership for a 26%
interest in the same. The funds raised apart from Flanigan's, in the
sum of $1,365,000, are reflected in the Consolidated Statements of Cash
Flow, Cash Flows from Investing Activities, Proceeds from Limited
Partnership Interests, page F-5. Flanigan's interest in this limited
partnership, which appears on its books and records as an investment in
this limited partnership, is eliminated on consolidation.
General
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7. In future filings on Form 10-K, Schedule II - Valuation and qualifying
accounts, will be included.
Finally, this letter also acknowledge that (i) Flanigan's is responsible for the
adequacy and accuracy of the disclosure in the Form 10-K for the period ending
October 1, 2005; (ii) staff comments or changes to disclosure in response to
staff comments do not foreclose the commission from taking any action with
respect to this filing; and (iii) Flanigan's may not assert staff comments as a
defense in any proceeding initiated by the commission or any person under the
federal securities laws of the United States.
I trust that this letter is responsive in all respects to your comment letter of
February 8, 2006 concerning Flanigan's annual report on Form 10-K for the period
ending October 1, 2005. Notwithstanding, should you have any further questions
or comments, please do not hesitate to contact me. Your assistance and guidance
in this matter is appreciated.
David R. Humphrey
February 22, 2006
Page8
Very truly yours,
FLANIGAN'S ENTERPRISES, INC.
Jeffrey D. Kastner
Chief Financial Officer and Secretary
JDK/lfk
cc: Jimmy Flanigan, President
Augie Bucci, Chief Operating Officer
Donna Willem, Controller
Chris O'Neil, Supervisor
Betsy Bennett,
Bennett Consulting
Ilyssa Blum CPA
Rachlin Cohen & Holtz LP